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Adopt, adapt, converge?

16 April 2010

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A contribution by Wayne Upton, Director of International Activities.

As the Director of International Activities for the International Accounting Standards Board (IASB) my job is to work with jurisdictions that are implementing—or thinking of implementing—the IASB’s International Financial Reporting Standards (IFRSs).

In the course of my job, I am often asked about the best way to move to IFRSs. The answer brings to mind an old American saying that, “All families are alike, and all families are different.” While there are similarities in both the challenges and the benefits that adopting IFRSs brings, every jurisdiction is different and will therefore follow its own path towards achieving the objective. We work with any jurisdiction that asks for our help.

Adopt, adapt, converge?

Many jurisdictions have cultural, legal, or political obstacles to an immediate full adoption of IFRSs. In the light of those obstacles, some countries decide on strategies of continuous convergence with IFRSs. Put differently, they have decided to bring their national standards to a point where the amounts reported in the financial statements are the same as in IFRS financial statements. We respect the reasons why those jurisdictions reach that decision, and work with them to support their convergence process. However, in doing so, it is our ultimate objective to make full adoption of IFRSs possible because we believe that only then will a country be able to fully benefit from the advantages of using IFRSs. Only recently, in January this year and as a result of the second Constitution Review, the Trustees of our organisation emphasised, through an amendment to the Constitution, that convergence is not an objective in itself but is a means to achieve the adoption of IFRSs.

While convergence may be the necessary preparation for some countries to adopt IFRSs, the simplest, least costly and most straightforward approach is to adopt the complete body of IFRSs in a single step rather then opting for long-term convergence. Certainly, this is a significant change, but the alternatives may be more difficult and may be of less benefit to a country in the long run. The main reason why most companies want to use IFRSs in their financial statements is the ability to demonstrate to the investor community that their financial statements are IFRS-compliant. For that purpose it is not sufficient that the standards have converged. The only way to make a valid that claim is to apply all the standards as issued by the IASB and make the compliance representation required by IAS 1. Hence, while convergence is good, adoption is necessary to be truly able to harvest the benefits of the change.

Making the transition

Once a jurisdiction has decided on the path it will follow, the task moves from policy to project management.

The plan. The key to a successful transition, whether the problem is manufacturing, retailing, or accounting, is to build a plan for the transition. That statement seems almost trite, but I am surprised by the number of jurisdictions that make the political decision to adopt or converge without having made a plan for how to do so.

In the case of an IFRS transition, there is a real risk of planning too small. Certainly a change in accounting standards affects the accounting profession, companies, and financial regulators.

On a national level, it may also involve pension regulation, health and safety regulation, education, and licensing. On a company level, it may affect debt covenants, personnel departments, and public relations.

The team. I think a successful IFRS team involves every sector that will be affected by the change. It does no good to have a team from the accounting profession, but not include the company regulation department. Even more important, the members of the team should have the power to make things happen in their individual circles. A team member who must “attend a meeting next month and report back” is unlikely to be effective. Finally, and most important, team members should be accountable for specific deliverables. At least within the team, no one should be able to say “I didn’t know it was my job.”

Plan for problems. There will be problems. There will be situations in which it seems that existing IFRSs do not consider or cover a particular situation that may be important in the country of adoption. Successful jurisdictions build a mechanism for identifying those cases and bringing them to a group charged with addressing them. Here, the IASB can be of particular help. In Korea, for example, local accountants accumulate transition issues through the Korean Accounting Standards Board. Papers are prepared, either by the accounting firms, companies, or the KASB staff. Then the issues are discussed at roundtable sessions in which I participate. The objective is not to produce Korea-specific answers but to gain a full discussion of the facts and possible solutions and necessary actions.

Educate. It is crucially important for the success of the IFRS project to build up an infrastructure of knowledgeable IFRS practitioners. This is especially important for stock exchange and financial regulators, but obviously extends to universities and the legal and actuarial professions. Fortunately, many groups are actively involved in IFRS training, including the major accounting firms, professional bodies like the ACCA, and the World Bank.

Involve the IASB

That is what we are here for. More specifically, that is what I am here for. There is no reason why a jurisdiction should try to handle transition by itself. Involving the IASB in the transition also builds relationships and involves the local standard-setters and professionals in the IASB process early on.

The views in this article reflect the articles of the author and do not necessarily reflect official positions of the IASB. A similar version of this article will appear in a special edition of the Malaysian business magazine The Edge on International Financial Reporting Standards (IFRS) with a theme, Convergence with IFRS: Impacts on Businesses.